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Providing Meals and Lodging to Employees

Under Sec. 119(a), meals provided by an
employer—including a C corporation employer—can be excluded from an
employee’s gross income if they are furnished on the business
premises and for the employer’s convenience. The employer can deduct
the full cost of these meals (the normal 50% limit does not apply in
this context); see Sec. 274(n)(2)(A) and (e)(4). Meals are furnished
for the employer’s convenience if furnished for a substantial
noncompensatory business reason. However, under Sec. 119(b)(4), all
meals furnished to employees on the employer’s business premises are
treated as furnished for the employer’s convenience if more than
half of the employees receiving meals are furnished them for the
employer’s convenience.

What Is “Employer Convenience”?

Determining whether a substantial noncompensatory business reason
exists depends on the facts and circumstances. A mere declaration
that the meals are furnished for a substantial noncompensatory
business reason is not sufficient.

Generally, meals provided
before or after the employee’s workshift are not deemed furnished
for the employer’s convenience; however, exceptions exist for
food-service workers, or if the meal would have been provided during
normal working hours for substantial noncompensatory business
reasons but, because of work duties, was not eaten during work
hours. In any event, meals provided on nonwork days do not qualify
for the exclusion.

The following examples show when meals
can be deemed provided for a substantial noncompensatory business
reason, according to Regs. Sec. 1.119-1(a)(2)(ii).

Meals furnished during working hours so employees are
available for emergency calls during the meal period (e.g., a
hospital requires its employees to remain on call during their
lunch hour) are furnished for a substantial noncompensatory
business reason. However, the employer must show that emergencies
have occurred or are reasonably expected to occur.

Meals furnished during working hours to employees because the
nature of the employer’s business restricts employees to short
meal periods (e.g., the peak workload is during the normal lunch
hour) are furnished for a substantial noncompensatory business
reason if the employees cannot be expected to eat elsewhere in
such a short time. However, meals do not qualify if the reason for
the short meal period is to allow employees to leave earlier in
the day.

Meals are furnished for a substantial
noncompensatory business reason if the employees could not
otherwise secure food within a reasonable period of time (e.g.,
there are insufficient eating facilities near the employer’s
premises).

Meals furnished to food-service workers
for each meal period they work are regarded as furnished for a
substantial noncompensatory business reason whether furnished
during, immediately before or immediately after the employee’s
working hours.

The deduction for other business
meal reimbursements is generally limited to 50% of the amount
otherwise allowable as a deduction, under Sec. 274(n)(2)(A).
However, the limit is 75% in 2007 for food and beverages consumed
while away from home by individuals subject to the Department of
Transportation’s hours-of-service limits, such as employees under
Federal Aviation Administration regulations, interstate truck
operators, bus drivers, railroad employees and merchant mariners;
see Sec. 274(n)(3).

Sampling: The IRS allows the use of statistical
sampling to establish the amount of substantiated meal and
entertainment expenses that are excepted from the Sec. 274(n)(1)
50%-deduction-disallowance rule. Rev. Proc. 2004-29 provides the
technical specifications for the sampling methodology in its
appendices. However, it does not (1) authorize the use of sampling
to substantiate expenses (as required by Sec. 274(d)); (2) authorize
the use of sampling to determine liability for employment taxes or
exclusions from income; (3) establish the correctness of an
employer’s interpretation of Sec. 274(n) or characterization of
expenses as ones that are excepted from Sec. 274(n)(1); or (4)
preclude the Service from raising or pursuing any income, employment
or other tax issue identified in the review of a statistical
sample.

Lodging: Employer-provided lodging may be
excluded from an employee’s income if it is furnished on the
employer’s business premises for its convenience and the employee is
required to accept these lodgings as a condition of employment.
Lodging and meals may also be furnished to the employee’s spouse and
dependents; see Sec. 119(a) and Regs. Sec. 1.119-1. Meals furnished
on nonworking days do not qualify for the exclusion.

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The package includes final regulations, guidance on how to calculate W-2 wages, a safe-harbor rule for rental real estate businesses, and new proposed rules on the treatment of previously suspended losses.

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